While global M&A activity has reached record levels lately, the Financial Times has reported that $540bn of proposed acquisitions had failed in the year to 9 August, the second-highest level in the last decade. This is in no small part due to many countries tightening their foreign investment and public interest review regimes. This article examines this new and uncertain climate for deal-making and what it means for cross-border M&A.
US leading the way to tighter FDI controls, with other countries following
The amount of Chinese investment into the US provides a good illustration of how FDI controls have affected deal activity. Chinese FDI into the US has plummeted from a high of $45.6bn in 2016 to only $2bn in H1 of 2018. China’s tightening of capital restrictions on outbound M&A has certainly played a role, but so has the hardened stance towards FDI on the part of the Committee on Foreign Investment in the United States (CFIUS). Three of the five deals blocked by a US president under CFIUS in the last 30 years took place since President Trump took office (the most notable being Broadcom’s attempted acquisition of Qualcomm in March 2018). But while blocked deals grab the headlines, a much larger number of deals is abandoned due to concerns raised by CFIUS (notable examples include Alipay’s attempted acquisition of Moneygram and HNA Group’s planned investment in Golden Eagle Entertainment).
But this is not just a US phenomenon. All other members of the G7 have strengthened their FDI or public interest regimes since 2015. And outside the G7, Russia has beefed up its rules while the European Commission is proposing to introduce a co-operation framework for member states in the screening of FDI.
Getting the deal through
In this brave new world of cross-border M&A, foreign investors should be mindful of the following when planning transactions:
- Take advice early. Seeking advice from legal and other experts at an early stage in the planning process is critical to assess the feasibility of a transaction.
- Pick your industries carefully. Industries involving national security and defence, critical infrastructure, advanced technology, telecoms and energy are most likely to attract scrutiny, but there are many other sectors that may raise concerns.
- Think about contractual protections. Parties need to build enough flexibility into their deal timetable to accommodate FDI review timelines and should consider including conditions precedent for FDI clearances in their deal documents.
- Develop a mitigation strategy. Be prepared to use creative mitigation remedies to address potential regulatory and political concerns. For example, to get its recent acquisition of Genworth Financial approved by CFIUS, China Oceanwide had to outsource the data management and security of sensitive information to a CFIUS-approved third-party vendor.
- Group structuring. The location of a merged company’s headquarters can be a (highly politicised) area of focus for governments and regulators. Dual headquarters or dual listings can help allay concerns about loss of control of a national champion or businesses with sensitive know-how.
The impact of foreign investment or public interest restrictions can greatly increase uncertainty for companies. As a result, early preparation for these issues and reviews, including engagement with all potential stakeholders using the right narrative, has never been more important to ensuring a successful outcome.